ESMA Takes Step to End Derivatives Standoff

Europe’s financial watchdog has launched a consultation to review how much margin is required for cleared derivatives trade, an important step to end a lengthy dispute with U.S. regulators.

The paper launched by the European Markets and Securities Authority (ESMA) said it would consider changing the EU’s ‘liquidation period’ for trades so as it to align it with U.S. rules.

The EU currently requires a two-day liquidation period, compared with one day in the U.S. By shortening the liquidation period, less collateral will be needed to back a trade.

The dispute has fragmented the over-the-counter (OTC) derivatives market, and has held up a transatlantic deal on granting equivalence to U.S. clearing houses.

“The difference in EU and US standards gives rise to the risk of regulatory arbitrage. In this context, the European Commission requested ESMA’s views and recommendations on the corresponding provisions … including whether changes to the EU rules may be necessary,” ESMA states.